Help me think through a financial decision.
I bought a rental property in suburban Raleigh, North Carolina in 2006. I paid $141k for it. Today Zillow tells me it's worth about $147k today. Impressive appreciation, I know.
I contacted a local realtor this week who tells me it's a "seller's market" there now and I could probably sell the property for $150k- $160k.
Let's think through various implications. There are tax implications, the what-will-I-do-with-the-proceeds implications, and the trying-to-be-strategic-with-my-future implications.
Fact: I live in New Jersey. Dave Ramsey would say this is reason enough to sell the rental property. He does not dig long-distance rentals.
Fact: The property hasn't appreciated much since I bought it, and it is questionable how much it will appreciate in the future
Fact: I have great tenants now. They've lived there several years. They pay the rent the day before the first of the month, though they do have an unfortunate tendency to clog the toilets - on a rather alarming basis...
Background: I fell in love with real estate as a retirement strategy while I was in my late 30s. My goal was to buy a rental each year from the ages of 40-50, then pay them off while I was in my 50s. Then I'd be able to retire at 60 with lots of income, and will lots of real estate.
But, the best laid plans....
There was the real estate meltdown, and the subsequent change that only allowed a total of 4 mortgages, and the unfortunate low-income properties I bought in Indianapolis.
I did buy three properties, at ages 40, 41 and 42. At the time I lived in the San Francisco Bay Area, where the price of houses is ridiculous, so I bought all three properties in remote locations.
The property in Portland was my first. And has had the greatest appreciation. And - get this - has the same tenants living in it. I've owned that house for 13 years, and the tenants have lived there longer than that!
But, back to the townhouse in North Carolina.
I owe about $75k on this property. If I sell it for $150k, pay 6% commission fee, I'll walk away with about $65k.
I'd have to pay tax on the capital gains, which won't be a lot, because I will sell it almost for what I paid for it. Plus, any gains will be long-term capital gains. But I'd have to add back what I've depreciated. Though most of the depreciation sits in an enormous NOL that I carryforward each year.
So, what to do with the money?
My budget for the kids college is $30k per year. I already have about $40k saved for Tommy, who is a junior in high school now. That would get us pretty well on our way.
Next question - should I put the money in a 529 plan, or regular savings? Or maybe peel of $6,500 to put in an IRA (for me), then put the rest in a college fund. Or, put $30k in each kid's college fund.
My son Tommy wants to join the service, and I am hopeful that he will get an ROTC scholarship. My personal plan is that he go to school freshman year, which I will pay for. He can join the ROTC program to see if he really wants to go that route. Then, he can apply for a scholarship sophomore year. If he is fortunate enough to get a scholarship, it will pay for (in-state) tuition, Then I would just need to cover room and board. My oldest sister did this, way back in the 1970s.
I called the (very anxious) realtor in Raleigh, and he hyped the market so much that I decided to hold on to the property. I have to remember my long-term goal of retirement income. I also asked a colleague from our London office for advice. He owns multiple properties - in London, Edinburgh and Armagh, Ireland, where he's from. When I laid it out to him "my mortgage is $660 a month (which includes property taxes and insurance) and the rent is $1,100 - it sounded silly to sell it.
In fact, he said to double-down and pull equity out and buy another house.
It can be hard knowing what is best. But I try to think of the long-term implications of decisions. Selling real estate is expensive, and this property has been a good rental, so I should stick to my original plan of having rentals pay my income in retirement.
Thanks for listening!
Ah, community college. Sometimes it doesn't get the respect it deserves. Well, community college shame should be a thing of the past. Smart people are strategically using these inexpensive schools to leverage their way to great degrees.
The truth is that community colleges can provide a great value. Both as a stepping stone, and a chance for the "late bloomers" to mature a bit.
Community colleges have a bad rap - as an extension of high school, a detainee center for those unable to "make it" in a real college, or a daycare center for the kids who didn't take high school seriously enough.
Community college costs vary widely across the country. They are now even free in some places. While that sounds like a great idea, I'm not convinced that's true. The old "unintended consequence" comes into play.
I lived in California for a long time where community colleges were very inexpensive. What happens is people sign up for classes that may not be seeking a degree. I remember one colleague whose daughter was at a "junior college" (as community colleges are called in California). She had a hard time getting the classes she needed. Being a full-time student was a requirement for staying on her mother's health insurance. So she was stressed.
In general, it can be hard to get in and out of a community college in two years. I heard other stories of people taking courses at multiple junior colleges to get what they needed.
That being said, community colleges offer a few great ways for your child to start his or her college career:
Maybe you forgot to save for college. Maybe you have enough saved for two years at a really great school. Maybe you think debt is the devil's .
handiwork. The cost can vary widely, but it is still pretty darned affordable.
Perhaps your child didn't take high school as seriously as he should have. Perhaps they went off to college with the best of intentions, but weren't quire ready, so came home to their parents' loving home to re-group.
Your child can take this time to really focus on getting their grades up. Just be sure that they know which courses will transfer. Don't want to lose any precious time.
Path to Top Schools
Did you know that some states have guaranteed admission to their top public schools?
Think UC Berkeley, UCLA in California, or William and Mary and University of Virginia.
Here's a look at the cost difference between NOVA and U.Va.
If we drop the numbers into a spreadsheet, as I am wont to do, you can see how the numbers play out. You can see that the in-state tuition at NoVa (Northern Virginia Community College) - is about $4,700, versus tuition at University of Virginia at $15,800. This means you'd save about $11,000 per year, more if your student lives at home. Cha ching!
University of Virginia is a very well-regarded top public school. Founded by Thomas Jefferson, if you haven't heard. Did you know they offer a path from community college? That if your child gets a certain GPA they are guaranteed admissions?
There is a VCCS (Virginia Community College System) program whereby if the student gets the appropriate GPA, signs a letter of intent and fulfills other requirements, they are guaranteed admission.
There is a great FAQ on U.Va's site which says that nearly half of the transfer students started at Virginia's community colleges. They really encourage it!
William and Mary also offers guaranteed admission program. William and Mary, a "public Ivy" is the college of 3 of our first presidents. Their website states:
California offers a similar path from their community colleges.
In California, the UC schools are considered to be the best, particularly Cal Berkeley and UCLA. As seen on this snapshot from my college database, the acceptance rates are 18% at each, and retention rates a screamingly high 97%.
If we look at UCLA's website, we see that they too offer a path from community college. It's called the Transfer Alliance Program.
The website further says:
"UCLA is committed to being a transfer-friendly institution. A strong academic preparation and performance make you a more competitive candidate during the admission review process. The average GPA of admitted transfer students is above 3.5, and admitted students have completed most or all major preparatory courses. We give highest priority to applicants from California community colleges and other UC campuses."
UCLA's site also states that almost half of their tudent body started out at a community college. I personally know a lot of people who took this path. After all, only the last school shows on your resume.
So, community college - not just for burnouts anymore! Your child has a chance to graduate from a school they may not have been able to get into as a freshman! Check your state's top schools to see if they offer a similar plan!
If you are strategic, you may not believe what you can accomplish!
I leave you with this video from Big Bang Theory:
Question: Why can't you cheat on a test at community college?
Answer: Because everyone you can cheat off is also at community college.
What scares you the most about paying for college? Do you even know how you're going to pay for college? Do you understand exactly how much your family will have to pay for college?
How do those questions make you feel?
First of all, I want you to decide right now that you won't let your children borrow for college. Really. Enough lives have been ruined with this toxin.
We've all seen the headlines and heard the stories of how student debt is ruining people's lives. We should take this as a cautionary tale and make sure that our kids won't suffer this fate. We should agree that our kids should have debt-free and regret-free degrees.
So, what are the 5 mistakes smart parents make? The mistakes that result in kids - now adults- calling Dave Ramsey looking for help. The ones who are so desperate and don't know how to get out of the mess they're in. By the way - if you have any doubts that student debt is terrible - any doubts at all - tune in to the Dave Ramsey podcast. That is what made me truly realize what a catastrophe we have on our hands. People call in on every episode with absolutely staggering amounts of debt. People whose student debt loads are multiples of their annual income. What were they thinking?
So, here we go:
Mistake #1 - Not Having Saved Enough
Enough said, right? Hopefully by now you have been scared stiff by the student debt horror stories, and will make saving for college a priority. That being said, it doesn't mean your child is doomed to debt if you haven't saved a lot yet. You should just take preventative measures - like having your child start at a community college. Hey, it may not be glamorous, but it gets the job done - at a fraction of the cost of a 4 year school. There are a few other reasons community college can work in your favor, as I lay out in this article.
Mistake #2 - Letting Our Kids Fall in Love With a School
My son tells me he'd like to go to UT Austin. Great school, I know. He hasn't given me any specific reason why he wants to go there. Nor do I know if he can even get in - it's pretty competitive. But the point is that the school costs about $50k per year for out of state students. Our budget is $30k per year. (Do you have a budget?)
I could either take the approach of "anything you want dear" (so I don't hurt his self-esteem, you know) and just have him borrow the $20k incremental amount per year, and have him graduate with $80,000 in student loans. Or I can say no.
Maybe your child has her eye on NYU, or Georgetown or some other pricey designer school. If you don't have the funds to pay for it, and you can't get enough aid, you should not let your child go to the school. Period. They will be thank you for it. At some point. Probably when they're in their 30s and looking to buy a home - and are able to because they have been able to save money, rather than having to pay off debt.
Mistake #3 - Out-of-State Tuition
This is a biggie. It is one of the most common expensive mistakes people make.
I work with two men now who have daughters going to Penn State. One of the men lives in New Jersey, and the other in Connecticut. Penn State is about $47k per year out of state. Ouch.
You hear the justifications "but the school has such a great alumni network - they'll have an easy time getting jobs!". Are we sure? And, how much do those jobs pay? Remember, your child's own aptitude and abilities will play a larger part in their successful careers than some alumni network.
Call me a cynic, but is the Penn State Football program playing any role in the decision making process? I'm just asking.
Mistake #4 - Not Keeping An Open Mind
If you want to get the best college value for your child, you need to keep an open mind. Some of the biggest misconceptions are that:
How about you? Have you said any of these things?
Mistake #5 - Not Telling Your Child "No"
We all want the best for our kids. But part of being a good parent is doing what is best for your child - whether they see it that way, or not. We as parents should recognize that debt is a terrible thing. And not to let our kids join that toxic club. Even if it's a school they claim they "have to" go to.
The common theme here is that we parents can and should influence our children and their college decision. I believe they can be just as happy at one school over another. What they definitely won't be happy with, is graduating with a mountain of debt.
Take my son, for example. As I mentioned in Mistake #1 above, he says he wants to go to UT Austin. On the face of it, it is too expensive. But there are options. As I describe in this blog post, there are ways he can go to school in Texas. He can:
A wise man said "there's always an option". You just have to work at it. The less money you have saved, the harder you will have to work at your solution. I'm here to help you!
Here is a bonus mistake:
Bonus Mistake - Not Matching The Degree To The School
If you want to be a teacher, you do not need to go to an expensive liberal arts school. Am I right? Most people go to regular schools, and can have very decent careers. In my 30 year career, I think I can count on one hand, maybe two, the number of people that I've worked with who went to an Ivy League or other fancy school. And I've worked at some top companies. In fact one guy would always be a bit embarrassed when people found out that he want to Yale, because the predominant reaction was an unspoken "and this is the job you have?"
So, please decide that you won't let your child borrow for college. Then figure out how you can get them through with the a) cash you have saved b) cash you can save between now and then and c) what you can pay out of cash flow. You may have to research more schools, or have your child go to a different type of school than you first thought, but that doesn't mean they will be unhappy.
After all, one third of all students transfer at some point in their college career. We all know people who have done this - so, couldn't a transfer be strategic? Such as starting at a community college.
As with my Texan example above, maybe you can afford the pricey school - but maybe just two years of it. Only the final school shows up on their LinkedIn profile, so I won't tell if you won't.
If you borrow money, you have to pay it back. Right? So why is it when some people borrow money in the form of student loans, they feel it should be negotiable whether to repay the debt?
Somehow the student loan that allowed them to go to school morphed into a fuzzy-ethical object. You'll hear that "the college signed them up for the loan", or that "they didn't really understand" what was happening, therefore they feel indignant that the loan people actually want their money back. They feel that Congress should wave its magic wand and erase the debt. Because it was for school. They had to borrow the money, you see.
People are borrowing money for college with little thought as to how it will affect their lives in the future. We've all seen the headlines: that millenials aren't buying houses, they are delaying having children, cannot have "normal" adult lives - all due to the crushing amounts of student debt they owe.
The other shocker is the level of Parent Plus loans - there is $77 million in outstanding Parent Plus loans at this time. I couldn't believe it! People in their 50s taking out student loans? Who needs to retire?
A woman I work with asked for my advice recently. She knows I help people learn how to avoid taking on debt in the first place, but asked if I had advice for her. She owes about $35,000 for her student loans. The thing is, she had a 4 year scholarship! And she graduated in 2003! But hasn't made any payments yet! Yes, 2003. She keeps asking for forebearance for the payments, and getting it. Of course, kicking the can down the road makes the loan balance grow and grow with all of that interest that is tacked on.
My colleague did tell me that she knows no one made her take out the loans, but she is hoping for some "real help". "Real help" is code for someone saying she doesn't need to pay it back. She asked if there was some point in time after which they'd forgive the debt. We spoke about loan forgiveness plans, but she correctly said you have to have made 120 payments before you'll get the forgiveness. It isn't an option for her because she hasn't made any payments.
I told her that she has to pay the money back. Simply put. She responded that they want her to pay $400 a month! Gasp! I said, well then that's what you need to pay.
She also knows the forebearance police will be knocking on her door at some point - and her payments will be higher/worse.
Another woman I know said her sister similarly hasn't made any loan repayments, and graduated many years ago. Not only hasn't she repaid any of the debt, but she now wants to got to graduate school - and add to the debt!
Another co-worker also asked for advice. His father co-signed for his student loans. Dad now wants to retire, so he wants to know how they can they refinance the loans under junior's name? The other wrinkle is that his income-based repayment plan is based upon his father's higher income. Like many people, Junior wants the monthly payments to be as low as possible each month, So, he'll be paying the loan off for many, many years to come.
Another colleague heard Junior talking about his student debt. This other colleague went to a CUNY school, where he excelled. He asked Junior how long it would take for Junior to repay his debt - Junior said "for fricking ever". The other colleague mentioned he was even given a stipend for attending CUNY. The punch line is that they have the same job. And make the same salary. Wow. Guess who is better off? Junior went to a state school in a state he didn't live in. Ouch.
There was a story in the news recently. A young woman wanted to become a nun, but the order wouldn't accept her due to her student debt. The prevailing sentiment was that the big, bad loan companies should forgive the debt. And let her nun it up. So, her first nunly act is to try to stiff the loan company? Hmmm.
There was another story in the news of a young man who died. His mother - who co-signed for the loan- was still on the hook for the debt. More media brouhaha over this. Of course, if Mom had co-signed for a car, house - or other loan, no one would think it odd when she would still be on the hook for the debt.
The truth with both of these last two scenarios is that they don't mention the type of student loan in question. Whether it was a traditional government loan, or a private loan.
Repaying debt sucks. It really does. There is absolutely no question about this. And it makes it almost impossible to build real wealth. So, if you have debt - the best strategy is to repay it as quickly as possible. That's all there is to it. Create a debt snowball, and have at it.
Yes, there are loan repayment plans of different stripes for those working in certain public service jobs, or working for non-profits. If that is the work you planned to do anyway, it may be a decent option. One of my sisters used a repayment plan for her law school debt. She was and still is a public defender.
But, I certainly a) wouldn't advise taking a low-paying job so you can repay less money or b) go to an expensive school if you plan to take a low-paying job. Match the school to the career.
Student loans are not discharged during a bankruptcy either, so don't go there.
So, now that we have all seen the devastation that student debt wreaks on people's lives - please don't let this happen to someone you love.
Is your child going to apply to a public college? Or a private college? They should be applying to both. Then you can compare the offers to be sure you get the best aid package.
Public schools require that you fill out the FAFSA form (Free Application for Federal Student Aid) . Private Schools require that you fill out the Profile form. Even if you think you won't qualify for financial help, fill out the forms. You may be surprised. These forms are also used for work-study plans.
What is the difference in the two forms? And how do they view your assets? Is there a difference?
Yes, there is. Let's take a look.
Expected Family Contribution
Let's start at the beginning, with the EFC. The Expected Family Contribution is one of the factors determining how much your family will pay for college. How is this number derived? By our government.
See the following chart, which I pulled from an article on Forbes. This is a quick reference EFC guide by salary.
Once you have your EFC, you can start to look at the other college cost factors.
The FAFSA form doesn't ask you if you own a home, let alone if you have equity in the home. The Profile form does ask. Though some schools don't include this in their financial calculations and some won't. Easy, right?
For the schools that will factor your home equity into the equation, there are two main ways this happens:
Example 1 - $100,000 equity in home
Example 1 - $300,000 equity in home
$100,000 x 5% = $5,000 added to EFC
$300,000 x 5% = $15,000 added to EFC
Or, the schools will use a "factor" for home equity and apply it to your income. Just to keep things interesting.
Example 2 - $100,000 equity in home,
Example 2 - $300,000 equity in home,
Income x 1.2
$100,000 x 1.2 = $120,000
$120,000 x 5% = $ 6,000 added to EFC
$100,000 x 5% = $ 5,000 added to EFC
Income x 1.2
$100,000 x 1.2 = $120,000
$120,000 x 5% = $ 6,000 added to EFC
$300,000 x 5% = $ 15,000 added to EFC
So, if you have a lot of equity in your home, it can "hurt" you, or the school won't even look at it. It depends on the school.
Here is a great article from Lynn O'Shaughnessy about home equity and how it is viewed. In the article Lynn links to an excel database that Paula Bishop put together In the blog post, she also references an article in the NY TImes. The article speaks to parents using home equity loans to pay for college. Wow. Do NOT do this! What are these people thinking? You are putting your home in jeopardy, as well as borrowing against your retirement. If you find yourself thinking this way - I suggest you instead focus on less-expensive schools, and/or the community college path.
Here is a summary of how the FAFSA and Profile forms view your assets:
Retirement plans - 401k/IRAs/pensions
Let's drop in some numbers to see how they compare.
Retirement plans - 401k/IRAs/pensions
The Expected Contribution would be calculated as follows: (multiplying % in the first table times $ amount in the second table above)
Retirement plans - 401k/IRAs/pensions
The total for the FAFSA assets equals $36,650 and the total for the Profile form is $36,660. So, it came out very close.
What about your child's assets and income? How do colleges view the student's asset?
up to $6,400 is shielded
expected to contribute $2,200
income of $5,000
$0 added to EFC
expected to contribute $2,200
assets of $5,000
$5,000 x 20% = $1,000
$5,000 x 25% = $1,250
Let's look at an example for the student:
Your child is working, right?
So, now that you have an idea of how colleges view your assets, you can be strategic with any windfall. Maybe you get a big bonus at work, find a priceless heirloom in the attic, or win the Irish Sweepstakes. You could position the assets accordingly to shield them, or just do your child a favor and put it all toward college costs.
To understand how much a particular college will expect your family to contribute, you could try a True Cost Calculator. Money Magazine has this helpful tool. It is not a substitute for going through an actual Net Price Calculator, but it's a pretty decent start. You'll note that it includes salary bands, which will give a pretty good indication of typical aid received at each level.
So, now that you have a better understanding of how colleges will look at your money, why don't you start researching schools for your children? To make sure that you are saving enough. Check out this article to get some great tips on how to research schools.